June 2017 // Real Estate & Home Builders Guide // 5M
Refinancing loan generally ‘resets’ clock
By Ilyce Glink
and Samuel J. Tamkin,
Tribune Content Agency
: Did I make a mistake by refinancing
my home loan three times over the
past 20 years? My loan balance is at
$100,000 from $130,000 after 20 years. I
realize I lowered my rate a few times and
my mortgage broker told me it was prudent
if the rate dropped more than one percent,
but I did not realize that my amortization
schedule got reset each time.
Am I now only paying off principal or
am I still paying interest for the life of the
loan? I’m confused and I am thinking I
made mistakes because I am not seeing my
loan amount reduced that much after 20
years.
: Yes, each time you refinanced your
property you “reset” the clock in terms
of the term length -- unless you opted to
refinance the lower rate for a shorter term
length. When you choose a shorter term
length, the payment tends to rise (unless
the reduction in the interest rate overcomes
that) because you’re paying off the loan in
a shorter period of time.
But when you cut back on the term
length, you are also paying more toward
the loan balance each month. That is why
Q
A
a monthly mortgage payment on a 15-year
fixed rate loan is so much higher than the
monthly mortgage payment on a 30-year
fixed rate loan. And, paying that higher
amount is a sure way to add to the equity in
the property.
The one thing you could have done to
benefit from refinancing so many times is to
have paid the same amount you previously
paid your lender. That is to say, if your old
payment for principal and interest on your
loan was $1,000 and your new payment
was $800, you could have continued to pay
$1,000. Your overpayment would have cut
years off the term of your loan.
By paying that extra amount, you’d
essentially prepay your mortgage balance
monthly, as all of that extra cash is applied
to the outstanding principal balance. That’s
another way to dramatically increase the
equity in your home.
As it stands now, you’re still paying
principal and interest each month on your
loan. When you reset the term, you went
back to paying mostly interest and very
little principal. As the months go on, you
pay more principal and less interest, but
in a 30-year loan you wouldn’t pay equal
amounts of principal and interest until
around year 14 or so.
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OFFICE
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